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On Monday, data released by the Ministry of Statistics and Programme Implementation showed that India’s Gross Domestic Product growth rate had contracted by 23.9% for the April to June quarter. In gross value-added terms, the economy had contracted by 22.8%, showed the data. These numbers are not only the lowest in the recent past but also the worst amongst the G20 countries. The numbers quantified what was evident all around: the Indian economy is in the doldrums.
Before we get into what triggered such a sharp decline, what and how much will this affect us and how can we overcome this grim situation, what we need to know is what exactly GDP means, how India measures it and how the historical trends have been.
What Is GDP? How Do We Measure It?
Gross domestic product (GDP) is a crucial metric for any country. It helps measure the total monetary value of all final goods and services produced by an economy over a particular period of time. This includes not only goods and services that are produced by domestic firms but also the output generated by foreign direct investment (FDI). As long as the output is generated within a country’s borders, the government will count it towards the GDP.
There are three different methods of calculating the GDP namely being the Expenditure Method, the Income method, and the Gross Value Added method. The Expenditure method calculates GDP according to how much money was spent during a particular period of time, the Income method uses the amount of money earned to ascertain the GDP, and The Gross Value Added (GVA) method or the factor cost method measures GDP by calculating value addition that was generate generated by each sector of the economy as it moves through the supply chain. India uses the Expenditure method and the Gross Value Added method (by considering eight sectors of the economy) to ascertain the GDP figure. The GDP number from the two methods may not be an exact match but the level of discrepancy should be minimal.
The Present Scenario
Since 1996, when the country started publishing quarterly GDP data, this is the first instance of negative growth. Credit Suisse estimates that the government and the wage earners took the bulk of the hit of this contraction. “We estimate the government bears 50% of the loss, wage earners 25%, informal firms 15% and corporations the remaining 10%,” the research firm said in a recent note. While much of that is already “water under the bridge”, the loss will have a lasting impact on the economy, it said.
What explains India’s dramatic slump? After all, the novel coronavirus spared almost no country, big or small. India’s particularly stringent lockdown – one of the harshest in the world – that brought almost economic activity to a standstill is to be blamed, observers say. Others say that the lockdown only accelerated a decline that had set in well before the pandemic struck. “There is no denying that COVID has played a role, but before that too there was a clear deceleration in the economy evident in the government’s own data,” said Joydeep Baruah, an economist with the Guwahati-based Omeo Kumar Das Institute of Social Change and Development. “Since 2016-17 there have been clear and visible signs of contraction – this reflected in both quarterly and annual data of the government.” This can be validated by comparing the growth rates of some of the previous quarters. From a high of 8.2% Q1, 2018-19, the growth rate had declined to a mere 3.2% in Q4, 2019-20.
What the Government Has to Say?
After MoS Finance Anurag ‘Desh ke Gaddaron Ko’ Thakur claimed “no COVID-19 impact on Indian economy” on March 18, the government is now insisting these are extraordinary “once in a one-and-a-half century” times. The Finance Minister stated COVID-19 is an Act of God, and may lead to a contraction of economy at the 41st GST Council Meeting. A revenue shortfall of Rs. 2.35 lakh crore is estimated. Not only tax revenue, the fiscal deficit also looks in dire straits as we breached our annual target in the four months. While the deeply concerning state of affairs ensue, BJP’s official Twitter handle posted this amazing conversation between Sarthak and Ramesh:
The government’s chief economic adviser attributed the deceleration to “exogenous factors”, referring to the Covid-19 pandemic and the lockdowns it necessitated. "India, too, is witnessing a sharp V-shaped recovery. The V-shaped pattern of recovery is seen in the following high-frequency indicators: auto sales, tractor sales, fertilizer sales, railway freight traffic, steel consumption and production, cement production, power consumption, e-way bills, GST revenue collection, daily toll collections on highways, retail financial transactions, manufacturing PMI, the performance of core industries, capital inflows, and exports," the Finance Ministry said in its Monthly Economic Report for August.
Since May, agriculture has persistently been the brightest spot in the revival of growth. Industrial production is showing definite signs of recovery with year-on-year (YoY) growth in eight core industries output showing a smaller contraction in July than in June, the report said. The ministry said consumption is picking up with passenger vehicle sales rising to their highest level at 1.83 lakh in July as compared to 1.43 lakh in March, "Some revival in rural demand is also seen in growing sales of small cars, two-wheelers and sports utility vehicles and fertilizers. Increase in registrations for commercial and agricultural tractors from 52,362 in March to 66,061 in August is further indicative of strengthening rural demand."
(Source: Live Mint)
As the number of coronavirus cases and deaths scale new heights everyday, there seems to be no light at the end of the tunnel, only time will tell whether we witness a sharp V-shaped recovery or continued period of stagflation.
Are We past the Contraction Phase?
While the pace of contraction may well ease, the near term prospects don’t appear to be promising. With the number of COVID-19 cases still rising, and localized lockdowns continuing, self-imposed curbs by individuals, coupled with risk-aversion by both households and businesses, suggest that normalization of activities to pre-COVID levels is unlikely in the near term. The country's real gross domestic product is now estimated to contract 10.9 percent in the financial year 2020-21, State Bank of India said in a report released on Thursday. The annual GDP contraction was estimated at 6.8% previously, the country's largest lender said in its Ecowrap report. The downward revision in the annual forecast for the economy comes days after official data showed the country's GDP contracted.
The report, however, highlighted some positives. The credit increased to all major sectors in the month of July, with the exception of the industrial sector. There was a significant increase in credit to the MSE, agricultural, and allied services sectors. New projects were announced in roadways, basic chemicals, electricity, and community services such as hospitals and water sewage pipelines. The report by SBI bats for the revival of sectors such as construction, trade, hotels, and aviation. It calls for restoration of transportation services and giving a push for the infra space by issuing special bonds such as perpetual bonds to the RBI. It also suggests that states should be supported through fiscal measures.
How Can the Economy Be Revived Now?
One major factor which would now affect the economic recovery would be the support that the government can provide through a fiscal stimulus. To tide over the economic fallout of the pandemic and subsequent lockdown, the government in May announced a nearly Rs 21 lakh crore stimulus package. Most of the announcements made so far, an attempt at restarting the economy with reforms on the supply side. The relief package provided immediate relief in the form of tax deferrals, cash transfers for the poor, and regulatory forbearance. A supply-side intervention attempts to clear supply-side bottlenecks in the economy to generate demand.
However, a demand-side stimulus seeks to revive demand by generating economic activity. With the economy now officially entering contraction, the focus should now be to revive growth. Experts believe that greater capital expenditure has a higher multiplier effect. The focus of the government now would have to be on higher public investments in infrastructure, which would allow global supply chains to invest more. The announcement of new projects, increased construction activity, timely payment, and initiation of fresh projects are some of the ways in which demand could be generated in the economy. Former NITI Aayog Vice-Chairman Arvind Panagariya stated on August 8 that the nation is going to possibly require 'a little bit of stimulus' on the demand side as the country's economic activity begins to expand.
Dilip Mishra is a B.Com (Hons.) graduate from the University of Delhi and has previously worked with S&P Global Market Intelligence as a Data Researcher.